Post-GDP Revisions Reveals Weaker Economy
On the surface the initial release of the first estimate for gross domestic product, for the second quarter of 2013, surprised to the upside coming in at 1.7%. This was significantly above the 1% consensus estimates and was greeted by flashing headlines of exuberance. However, the headline number was distorted by revisions going all the way back to 1929 to account for research and development (R&D) investments and pension deficits as part of the GDP calculation. This was the largest single set of revisions in the history of the Bureau of Economic Analysis.
The timing of this revision smacks of some poltical bias as we head into a debt ceiling debate and a rather contentious Congressional election in the coming year. The economic data has been inordinately weak since 2009 despite trillions of dollars of injections, bailouts, supports and monetary policy interventions. A quick change to the calculation and "voila" - a better economy. The problem, however, is that if you go and check your bank account there was not a sudden increase in the value to account for the stronger growth that has now magically appeared.
Despite the issues of the revisions, which I will cover in more detail in the near future, the revised data is now what I must work with when analyzing the strength and trend of the economy and its potential effect on investment portfolios.
The first chart below shows the difference in real (inflation adjusted) GDP pre- and post the revisions.
What were initial small adjustments to GDP in 1947 amounted to $1.86 Trillion difference in the 1st quarter of 2013. However, data in this form really is not very useful. Population growth contributes significantly to the steady increase in economic output over this time frame when in a raw dollar format.
While this seems like a substantial increase in the output of the economy if we analyze the data a bit differently we can see that actually it isn't. The chart below shows the comparison of the annual rate of change of both pre- and post-revision of real GDP.
As you will notice there is very little difference between the two charts until you get into the middle of 2012 which was revised significantly higher. However, that has quickly faded in recent quarters as the annual rate of change in the growth of GDP has declined sharply. This is more clearly shown in the next chart which shows GDP converted into a "recession indicator."
Historically, when the economy has fallen below a 2% growth rate for more than 2 quarters it has generally been coincident with the onset of a recession. There have only been two cases, so far, where this has not been the case. The first was in early 2007 but a brief uptick in economic growth was simply a "head fake" leading to the onset of the largest recession since the "Great Depression." The second event was during 2011 as the economy took a double whammy from the Japanese earthquake and the fiscal scare from the "debt ceiling debate." A recession was averted later that year due to a "perfect storm" of events as the Federal Reserve implemented further monetary supports, oil prices plunged and the economy was supported by the warmest winter in 65 years.
The issue currently, is that post the 2013 revisions to the economic data, we find that the economy is currently growing even weaker than previously thought and the first estimate of second quarter GDP puts economic growth at just 1.43% annualized which is the 3rd straight quarter of sub-2% economic growth and the slowest rate prior the last recession.
Real Final Sales Plunge
In the most recent Federal Reserve statement Mr. Bernanke stated that the economy had improved modestly in the first half of 2013. However, real final sales of domestic product, which is GDP less change in private inventories, fell sharply as shown below.
As with the chart of GDP above; historically when real final sales have fallen below a 2% annualized growth rate it has been coincident with a recession. Currently at 1.46% this is the slowest annualized rate of declining growth since 2008.
"Main Street" Under Pressure
Despite the revisions to the data, which boosted economic output, it has done little to impact a large majority of the population that are struggling to maintain their standard of living. The 4-panel chart below shows the long term trend of personal incomes, consumer spending and the personal savings rate as compared to GDP. (The vertical red lines denoted the peak of economic strength in early 1980.)
Despite the Federal Reserve's cheery assessment to the contrary; there is scant evidence of an economy that is currently improving. With an economy that is currently built on roughly 70% personal consumption (68.3% after latest revisions to the economic data to be exact) it is hard to see where economic growth is going to come from when incomes remain under attack by slow economic growth and high unemployment. Savings rates are being depleted as debt levels increase to maintain the current living standard as cost pressures are passed down from producers.
Regardless of the revisions to the economic data the trends are clearly weak and, unfortunately, seems to be getting weaker. While the Federal Reserve continues to state that negative drags to economic growth are fading and that the economy is showing signs of accelerating the actual data suggests otherwise. Of course, if the Federal Reserve truly believed what they were stating, they wouldn't need to be keeping interest rates at near 0% while injecting $85 a month into the financial markets to keep the economy afloat.